Visually Compelling TA

At the onset of SLO2 I put one third of my portfolio into airlines. The airlines have done very poorly in the last few months. My thesis for airlines had three components and all three are still in play. I expect these components to come to fruition in two to three years, but the contest has a limited time horizon and I have no expectation any of them will recover by the end of this contest. I have sold all airlines from my SLO2 portfolio.

The first component was the likelihood of a consolidation. This notion is still in play and recently the expected merger of Delta and Northwest was finally announced. Such news heightens one's expectation for an eventual three-airline industry. But it was met with a yawn by the market and it fails to bring more money into either airline. There is further expectation that a European airline will buy one quarter of the combined airline. This is unlikely to happen before the end of SLO2. When this does happen, if this is a genuine cash deal then we will see a bump upward. However, if the investment is in more airline stock or if there is a deal that creates a separate class of stock diluting the value of common stock, we may not enjoy such a bump.

The second component is airline pricing power. The airlines seem to impose additional fees to their customers with impunity. The demand for air travel remains high and there are limited seats on many routes. Further, airline executives speak frequently of reducing capacity. Unfortunately this pricing power is not keeping up with rising jet fuel prices. Even the consistently profitable Continental (CAL) cannot show a profit. The next round of earnings announcements will be after the end of SLO2.

The third component was an expectation of declining fuels prices. It seemed to me oil prices were in the right-hand shoulder of a head and shoulders pattern. I was in good company (e.g. T. Boone Pickens) anticipating lower oil prices. Alas, quite the opposite happened and the rise in oil does not appear to be abating. While the run-up is likely unsustainable, I do not anticipate oil dropping significantly before the end of SLO2.

My recent chess-themed post discussed where I've invested the proceeds. http://www.investorplaceblogs.com/users/jmcdowell/2008/04/how_investing_imitates_chess_8.php

Comments: View Comments |  Thursday April 24, 2008